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management firm, unveiled a green-bond in-
vestment strategy. In the absence of a green-
bond index, the relevant portfolios will be
bound by certain rules. They will be dominat-
ed by green bonds, rated AA or higher, and in-
clude those of at least three issuers, with none
commanding a majority of the portfolio. Ac-
cording to Sean Kidney, CBI’s boss: “This is
the first time one of the big beasts has dipped
its toe into the water”.
Greenness aside, such bonds are indistin-
guishable from any other investment-grade
“plain vanilla” security. They carry no extra
costs: investors are not exposed to the risks
in the World Bank projects that are funded by
the bonds. Nor do they profit if those projects,
which typically include renewable-energy ini-
tiatives and reforestation schemes, do well.
So why bother to invest at all? One answer
is the indirect benefit that investors derive
from addressing the economic risks of global
warming. To encourage this, the World Bank
briefs them on its green projects. A more ob-
viously venal motive is that green investing is
good for the image – unusually, the World
Bank publishes the names of investors in its
green offerings.
A funkier sort of green bond was once envis-
aged. When expectations of carbon markets
were higher, plans were afoot for bonds of-
fering a mixture of financial returns and car-
bon credits. The new conservatism reflects the
winnowing of those expectations. It also rep-
resents a hardened appreciation that few insti-
tutional investors – even in do-gooding Scan-
dinavia – will pay a premium for green. “They
aren’t clamouring for green investment oppor-
tunities,” admits Chris McKnett, SSgA’s head of
environmental, social and governance invest-
ing. “For this to work at scale there can be no
haircuts involved in putting money into green,
rather than brown or vanilla”.
The rise of dull green bonds should address
a perception among some investors that cli-
mate-change investments must involve a catch.
“There’s a bit of cynicism”, says Stuart Kin-
nersley of Nikko Asset Management, a big in-
vestor in World Bank green bonds: “There’s a
general belief that you’re paying more for this
extra bit of green, even though you’re not”.
But these instruments are only a stepping
stone to the much greater capital flow that
greening the world economy will require. For
that to materialise, investors will have to con-
clude that low-carbon developments offer sta-
ble returns. Some signals have been discour-
aging: a bond issued by CRC Breeze Finance, a
vehicle formed to raise cash for a fleet of wind
farms, was downgraded to junk after their
sails turned less than predicted. Others are
more hopeful: tumbling costs of wind and so-
lar energy suggest it may soon be competitive
with little or no subsidy. Until that happens,
don’t expect a green rush.
“The Economist”, October 29th 2011.
According to estimates how much money must be invested by 2035 to reduce emissions?
What does “green bonds” mean?
Can you describe the green investment strategy of big asset-management firms?
What are the advantages of investing in green bonds?
?
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